Impending Patent Losses Creating Eli Lilly Uncertainty

Eli Lilly(NYSE:LLY)discovers, develops, manufactures, and sells pharmaceutical products worldwide. Eli Lilly's headquarters are in Indianapolis, Ind. The company has a market cap of $56.8 billion, and its stock price is around $51.

On Oct. 8, Eli Lilly's stock price jumped by 5.3% on four times its average volume of trade. The reason the stock rallied is because it was announced that an independent study on Solanezumab, Eli Lilly's experimental Alzheimer's treatment, showed that it slowed memory loss and cognitive decline in early-stage patients by 30%. The Solanezumab study offered the first evidence that the drug could slow the progression of the disease. The independent study supports Eli Lilly's August report: "Solanezumab is an antibody drug designed to block amyloid beta, a protein that is thought to destroy the brain in Alzheimer's. Pfizer(NYSE:PFE), Johnson & Johnson(NYSE:JNJ), and Elan(NYSE:ELN) recently scrapped another beta amyloid antibody when it failed to have efficacy." Investors are excited about the study because there is no known cure for Alzheimer's, and there are 5.4 million people in the United States who are affected by the disease.

While investors are excited about the new study, Solanezumab is a long way from being marketed as a drug that can cure Alzheimer's. The drug shows promise, but it will still have to go through large-scale clinical trials, and it could be years (if ever) before the drug gets government approval to be sold to patients who are at risk for Alzheimer's disease.

Today, Eli Lilly's stock rallied because of the Solanezumab announcement. However, Eli Lilly has given investors a number of reasons to bid up the stock price. For one, Eli Lilly's blockbuster drug Cymbalta, generated record sales of $2.3 billion in the first six months of 2012. In the second quarter, Cymbalta's year-over-year sales increased by 22%. Eli Lilly also has a new diabetes treatment in its pipeline. The treatment, which is an insulin glargine product (LY2963016), could compete against Sanofi's diabetes treatment Lantus. Eli Lilly's long-acting diabetic treatment is its most valuable product, and given its biological similarity to Lantus, its approval seems likely. EvaluatePharma believes that LY2963016 has a net present value of $2.13 billion. Eli Lilly desperately needs for LY2963016 to be successful because, like other pharmaceutical companies, it will be losing the patent exclusivity on some of its biggest revenue-producing drugs. With the potential for losses due to patent expirations, Eli Lilly's future does not look certain, but investors seem to think that the company will navigate the loss of its most valuable patents.

Recent Eli Lilly News

On Oct. 8, combined results from two studies of an experimental Alzheimer's drug suggest it might modestly slow mental decline, especially in patients with a mild version of the disease. Taken separately, the studies on the drug by Eli Lilly missed its main goals of significantly slowing the mind-robbing disease or improving activities of daily living. But pooled results found 34% less mental decline in mild Alzheimer's patients compared to those on a fake treatment for 18 months.

On Sept. 6, Eli Lilly's Phase III Pointbreak trial did not meet its primary endpoint of improved overall survival in lung-cancer patients, although it did meet a secondary goal of improved progression-free survival for the Alimta arm.

On Aug. 29, it was announced that Eli Lilly is halting the development of its mGlu2/3 schizophrenia drug after a recent analysis indicated that the treatment was unlikely to succeed in a second Phase III trial, having already failed in a previous study. Another mid-stage trial, which was testing Glu2/3 as an adjunctive treatment with atypical antipsychotics, was unable to meet the main study goal.

On Aug. 26, Eli Lilly's Effient blood thinner surprisingly failed to perform better than Plavix, an older drug, in the study of 9,000 patients. The outcome is a blow for the hopes of Eli Lilly and partner Daiichi Sankyo in expanding the use of Effient.

Conclusion

Eli Lilly stockholders are probably feeling pretty good after the events of Oct. 8. The stock rallied higher by $2.55 to a 52-week high of $50.78. The catalyst for the Oct. 8, rally was the announcement that Solanezumab was somewhat effective in slowing the progression of Alzheimer's in patients that were in the early stages of the disease. While anxious investors jumped at this news, the truth is that the study results were not statistically significant, and Eli Lilly is no closer to marketing the treatment than it was before these new results.

What concerns me about Eli Lilly is that the stock price has moved higher by 34.7% over the last 52 weeks, despite the fact that the company's three biggest revenue producing drugs have lost, or will lose, their patent exclusivity by the end of 2013. The company lost Zyperexa which had 2011 sales of $4.62 billion to the patent cliff in 2011. The company will lose patent exclusivity for Cymbalta, which had 2011 revenues of $4.16 billion, and Humalog, which had 2011 revenues of $2.37 billion in 2013. The total lost revenues for these three drugs could run as high as $11.15 billion. I think that the loss of this much revenue puts Eli Lilly's future in limbo because it does not have drugs in its pipeline that can fill the vacuum. I like Eli Lilly's strong balance sheet and I think that its dividend (4.1%) is safe, but once the elation from the Solanezumab announcement wears off -- combined with the run up to 34.7% -- changes my mind about this stock. I believe the stock price will almost certainly go down.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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